An Inclusive Emerging Economy, With Africa in the Lead

Fanta Niambaly, left, the president of the Banakoro village Saving for Change group in Mali, and Fatou Doumbia, a fellow member. Credit Rebecca Blackwell/Oxfam America

At a time when news about Africa has been dominated by Ebola, it’s worth observing that a highly encouraging change has been quietly spreading across the continent. Over the past five years, the number of Africans — mainly women — who have joined village-based savings and loan associations has soared to more than nine million. These groups are now operating in 40 countries in Africa. Globally, it’s estimated that 10.5 million people are members of formally trained savings groups in about 65 countries. (PDF) The big story about these groups, including their surprising success and emerging importance in development, comes from Africa.

What’s most significant about savings groups is that they are designed to be wholly managed by villagers themselves.

“A giant informal economic system is emerging invisibly,” said Jeffrey Ashe, a micro-finance pioneer and co-author of the book “In Their Own Hands: How Savings Groups Are Revolutionizing Development.” “We can think of it as the amoeba model of microfinance. It’s financial inclusion without financial institutions — and each group has the DNA within itself to self-replicate.” (PDF)

The story dates back to 1991, when a Norwegian, Moira Eknes, working with CARE in a remote part of Niger, found that village women needed ongoing access to savings and credit, but had few options. In West Africa, as in many parts of the world, locals had long participated in traditional rotating savings clubs (locally called tontines, generically known as Roscas).

Eknes helped the women develop a simple methodology that allowed them to transform the groups into a self-generating, self-managing form of microfinance suitable for their basic needs. The approach became known as the Village Savings and Loan Association (V.S.L.A.) model and it began to spread.

The growth was supercharged in 2008 when the Bill and Melinda Gates Foundation injected more than $30 million of funding into the model. (PDF) Since then, CARE has brought the program to four million Africans. Catholic Relief Services and Plan International have each brought variants to more than a million people, and Oxfam America and Freedom from Hunger have scaled up an approach, called Saving for Change, to 650,000 members. More than a dozen other major international NGOs have advanced this work. Collectively, they aim to reach 50 million members by 2020.

What’s most significant about savings groups is that they are designed to be wholly managed by villagers themselves; by and large, they function as they are intended to function; and they reach impoverished people in remote rural areas who would otherwise go without any financial services, even microfinance.

The main expense is for training. Villagers are taught how to run their own meetings, develop bylaws, elect officers and keep records (where literacy levels are low, they use oral record-keeping systems). Groups usually have 20 to 25 members. Each week they collect savings. Members must contribute an amount within a set range, no more, no less. All the money is kept in a box. One standard is to have three locks and three key holders. All transactions are conducted openly before the group. Some systems use passbooks, others use ledgers.

Typically, members can apply for loans on a monthly basis. Villagers determine interest based on rules they have established themselves. They may exact fines for late payments or late meeting attendance. “All the money stays with the group, so there’s no question about extracting money off the backs of the poor to run institutions — or to enrich investors — as we’ve seen with some of the worst cases in microfinance,” said Ashe, who launched and led the Saving for Change initiative.

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The Saving for Change group in the village of Doumnba in southwest Mali has 25 members.Credit Rebecca Blackwell/Oxfam America

Members take loans for a variety of reasons: to buy medicine, start a business, purchase animals, pay school fees, buy clothing, buy food during the lean season, invest in agriculture. Repayment terms vary. At the end of the group’s cycle, usually a year, the savings and profits (from fines or interest) are distributed. And the cycle begins again.

“What makes this nice as an intervention is that it needs no financial infrastructure to make it work,” explained Dean Karlan, a professor of economics at Yale University and president of Innovations for Poverty Action (I.P.A.), which conducted a three-year randomized controlled evaluation of the Saving for Change program in Mali, and CARE’s V.S.L.A. program in Ghana, Uganda and Malawi. “It needs no bricks and mortar. You just demonstrate it, walk people through it, and they can keep doing it.”

The I.P.A. study in Mali didn’t find that villagers in savings groups experienced big increases in income or consumption, Karlan said. What the savings groups did do was reduce one of the most debilitating aspects of poverty: vulnerability. “One of the things that savings is supposed to do is move money from times when you are flush to times when you are not flush,” he said. “We saw evidence that people in Saving for Change in Mali had higher food security. During the lean season — well after harvest, before the next harvest — we saw hunger go down. That’s a very important result.” (PDF)

Households involved in Saving for Change owned, on average, $120 more in livestock than those from the control group — a strategy used by people in Mali to reduce the risks from illness or droughts, the latter having become far more severe because of climate change.

Without savings groups, the villagers would have no other options for financial services. “For most of the areas we were working in, there is no microcredit,” Karlan said. “It’s too expensive to go out there.”

The savings groups have proven to be quite stable. And as members become skilled at managing the process by themselves, they often go on to train other villagers. Because the groups don’t require external capital, they’re not tied to the capacity of NGOs. However, I.P.A. found that organically replicating groups in Mali didn’t provide the same level of benefits to members as groups that received structured training.

Villagers are also reliable with loan repayment. “In an African village, people know one another and they can capitalize on that knowledge,” said Hugh Allen, chief executive of VSL Associates and a former senior adviser for CARE who has played a key role spreading the V.S.L.A. model and tracking savings groups at the global level. “If someone wants to take a loan to grow beans, their members might say: ‘Well, look, we know you know how to grow beans, but we think you’re being a bit ambitious.’ There’s this incredibly fine awareness of who their group members are that a financial institution cannot approach. You dare not diminish or degrade your social capital in this context.”

“We’ve seen groups working for eight or nine years without any support from us,” added Sophie Romana, director of community finance for Oxfam America. “In a day and age when everyone says international aid is inefficient, this doesn’t cost a lot of money and it can be a lifelong change. These women keep on meeting and saving together whether we’re there or not.”

As savings groups have multiplied, development organizations are looking ahead to next steps. One question is: How can the model be spread more cost effectively? Some organizations, including CARE, have enacted a fee structure in which villagers cover part of the cost of their own training. In the Saving for Change model advanced by Oxfam America and Freedom From Hunger, village-based volunteers are enlisted in some cases to train others.

But there may be other possibilities. “Up to this point the spread has been fairly mechanical,” said Kim Wilson, a microfinance expert who is a lecturer at the Fletcher School at Tufts University (and co-founder of a terrific website about micro-savings). “You have promoters who go out and form these groups. But have we looked at mass media, local radio or TV? Can we spread the word in a way that’s more efficient than we’ve been doing?”

Related

Another question is: What should be done with this platform and the emerging management capacity and financial skill it represents? There are two schools of thought. Proponents like Ashe and Allen would like to see development organizations keep doing what they’ve been doing: spending their time and money training more groups. But the big development groups and funders have shifted their focus to building links between savings groups and banks, looking to create mobile banking services that work for both individuals and groups (a challenge given post-9/11 “Know Your Customer” banking regulations.)

Allen finds this change frustrating. “In the fine old tradition of international NGOs,” he said, “if you find something that works, be creative and go mess it up.”

Lauren Hendricks, executive director of CARE USA’s Access Africa initiative, favors the shift. “Savings groups are great,” she said, “but they’re not full financial inclusion. They don’t provide all the products that people need when they need them.” CARE is now working with banks and telecommunication companies to get them to recognize the financial history and skills of people in V.S.L.A. groups, and to offer products and services tailored to their needs. “We’d like to see savings groups become a pathway for formal financial inclusion,” she added.

Oxfam America is also pursuing opportunities to build up local knowledge through savings groups. “People want to come to these meetings because money is at stake,” Romana said. “If you happen to add some lessons on health or agriculture or small business, you’ve got an audience. That’s what’s exciting.”

“As with any single strategy, this is not going to lift people out of poverty,” Ashe said. “But it’s simple, low-cost and resilient – and it can be carried out by normal NGOs and spread virally. And what’s most important is that development is truly in people’s own hands.”